INTM601120 - Transfer of assets abroad: The income charge: Measure of income - trading companies

The income of a trading company which is to be taken into account for the purposes of the income charge is generally the balance of profits that would be chargeable to tax in the UK. Therefore, in arriving at this amount regard should be had to the provisions in Part 2 ITTOIA 2005.

It may be that deductions are claimed in respect of emoluments paid by a company to the individual who is subject to the income charge. If a deduction is allowable under ‘normal principles’ as above then, although the amount within the income charge is effectively reduced, emoluments are within the direct income tax charging rules.

The measure of the income of a trading company featured prominently in Stephen Hoey & Others v HMRC ([2022] EWCA Civ 656). Mr Hoey worked in the UK as an IT contractor for UK clients under arrangements with two offshore entities that employed him. Via intermediaries, these offshore employers received trading receipts for providing Mr Hoey’s services to UK clients and paid most of Mr Hoey’s remuneration into offshore employee benefit trusts (EBTs). The trustees of the EBTs then made regular interest-free loans - which were not expected to be repaid - to Mr Hoey.

In this case, the question arose whether the payments made by the offshore employers into the EBTs in respect of Mr Hoey’s remuneration should properly be deducted in computing the employers’ trading profits. HMRC argued that the payments into the EBTs were not deductible because they could not have been made wholly and exclusively for the purposes of the employers’ trades and were ultimately tainted by an additional purpose: that of assisting Mr Hoey to avoid UK income tax.

The Court of Appeal disagreed, concluding, at paragraph [198] of their judgment, that HMRC had not displaced the

strong prima facie inference that the whole amount of the payments into the EBTs in respect of Mr Hoey’s services was properly deductible as expenditure wholly and exclusively incurred for the purposes of the Employers’ trade.

The result of this conclusion was that the quantum of the trading income of the offshore employers was nil.

In circumstances where an offshore company’s trading expenses exceed its income the result will be a loss. The transfer of assets provisions are charging provisions only and, specifically, charge income treated as being that of the individual. There is no provision for treating such a loss as that of the individual.

However, it is HMRC’s practice to allow an offshore company’s trading losses to be carried forward and to be set off against the future profits of the company. They cannot be offset against the company’s investment income of the same, previous or future years.

Where the person abroad is a mixed trading and investment company, then the company’s transactions in securities, property etc. may sometimes lead to difficulties in deciding whether it should properly be treated as an investment company or a dealing (trading) company. This question may be of considerable importance in deciding whether large gains should be included as income of the company or regarded as capital gains. The judgement in Marson v Morton (59 TC 381) gives guidance on what might indicate a trading activity.

It should be noted that forex and loan relationship rules apply for Corporation Tax purposes only.